Fresh thinking puts infrastructure financing within reach

Infrastructure financing within reach

Infrastructure developers have blamed a lack of finance for the slow rate of municipal infrastructure creation since the 2008 financial crisis. Rather than financing, I believe the challenge is identifying who will pay for the return to a project’s investors.

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By Darryl Murphy, KPMG in the UK

Infrastructure developers have blamed a lack of finance for the slow rate of municipal infrastructure creation since the 2008 financial crisis. I think that prognosis is misguided and stems from a misunderstanding of the difference between financing and funding. Rather than financing, I believe the challenge is identifying who will pay for the return to a project’s investors.

It is vital our city authorities maintain – and even accelerate – the pace of development in our public infrastructure. The OECD estimates that globally we require US$40 trillion in infrastructure over the next 20 years1. I believe this figure will climb higher as climate change puts greater strain on the built environment.

Who currently pays for it? In 99 percent of cases, the taxpayer, end-users or taxes on commercial property foot the bill. In other words, you and I pay, either indirectly through taxes or directly on a charge for using the transport networks, sports facilities or other amenities.

Addressing where the burden falls is a difficult and divisive issue for councils as seen recently in the debate around Manchester’s attempts to introduce congestion charging. While it might be tempting to push the cost on to end users, raising taxes is never popular and Britain’s National Audit Office has urged caution. In 2013, it warned households could struggle to pay their bills due to the increased cost of infrastructure investments made by utility companies.2

There is another solution, however. City authorities can attempt to offset part of the funding that might ordinarily come from citizens by instead monetizing their existing assets. Resource rich countries can use their mineral wealth; for example, a gold mine in Africa might pay for the nearby infrastructure it uses, like a port or a railway line.

How does that translate to a city like Bristol, without such an obvious source of income? I believe council leaders should look to generate a cash flow from existing assets, and enhance those assets over time to create a virtuous circle of revenue generation. Bristol has already shown its entrepreneurial spirit in this way by setting up its own energy company.

For other cities, the major asset might be property and this is where real estate can provide an important source of funding. In the United States, authorities utilize tax increment financing. This means relying on the economy to grow thanks to an infrastructure investment. A related business tax then generates revenue against this future growth.

London’s Crossrail development partly uses this mechanism. It will generate more business along its line – particularly in the center of London – so a portion of business rates in the areas that benefit from its construction will go towards funding the project. Similar developments can be seen through City Growth Deals designed to promote economic growth at a city level and other assets such as the new high-speed rail station in Birmingham.

Does this presage a new route for funding infrastructure investment: spreading the cost of a project between all beneficiaries of infrastructure investment? Flood defences, crime prevention, and health initiatives are designed to benefit individuals, businesses, insurers and others, so maybe they should all share the cost?

Cities have to behave like start-ups in seeking an investment. Identifying assets that could generate a future revenue stream and presenting ‘concrete’ plans should encourage investors and take the pressure off taxpayers. Investors might buy into a vision, but not likely a dream.